The opinion of the court was delivered by: KALODNER
These are actions (consolidated) for the recovery by plaintiffs (brothers) of alleged overpayment of income taxes for the years 1937 and 1938.
A jury trial was waived, and the case was heard before the court on the pleadings and stipulation of facts without additional testimony.
The plaintiffs, while solvent, purchased at less than face value their own obligations in connection with a real estate transaction under the circumstances set forth in the Findings of Fact.
The government contended that in doing so they realized taxable income during the years 1937 and 1938 when the obligations were purchased at a discount, under Section 22
of the Revenue Act of 1936, c. 690, 49 Stat. 1648, 26 U.S.C.A. Int.Rev.Acts, page 825, and Article 22(a)-14
of Treasury Regulations 94, promulgated under the Revenue Act of 1936.
The stipulated statement of facts, which is hereby adopted as the Findings of Fact of this court, is as follows:
I. In June, 1926, the plaintiffs, who were brothers, and another brother, Samuel Frank, purchased real estate known as 414-22 S. 16th Street, Philadelphia, Pennsylvania, from Herman Collins and Gertrude, his wife, at a cost of $108,000 -- $43,500 of which was represented by a purchase money mortgage secured by the property.Title to the property was taken in the name of Max Frank on behalf of himself and his brothers.
II. The building which was on the property aforesaid was razed and a new garage building was erected on the site at a cost of $130,000 and completed in May, 1927.
III. On May 10, 1927, Max Frank, who held legal title to the property, borrowed the sum of $110,000 giving the property as security for payment under a first mortgage, there being 110 first mortgage notes for $1,000 face value each, dated May 10, 1927, all maturing three years after date, or on May 10, 1930. Max Frank was the maker of these notes which were called "bonds" and the Philadelphia Company for Guaranteeing Mortgages, Trustee, was the payee and mortgagee. Thereafter the bonds were sold to the general public.
Of the sum of $110,000 borrowed as aforesaid, there were made the following disbursements at the time of the Title Company's settlement between the parties to the loan:
To Herman Collins and wife, in satisfaction
of purchase money mortgage and inter-
terest thereon $44,619.30
To J. M. Rosenberg, final installment due
on account of building contract 19,000.00
To Philadelphia Company for Guaranteeing
Mortgages, fee for guaranteeing mortgage 3,850.00
Water rent 28.75
Boiler insurance 152.70
Title Company charges for mechanic's lien
insurance, title insurance, etc. 1,063.00
Miscellaneous recording charges, etc. 27.00
To Max Frank 39,271.75
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